China’s Coal Burnout

WHY YOU SHOULD CARE

Because as economies around the world depend on coal reserves that may never be sold, the “carbon bubble” is getting set to burst.

March 10, 2014

Environmentalists around the world were predictably outraged when Australia approved the dumping of 3 million cubic meters of sand in the Barrier Reef Marine Park as part of a coal port expansion plan. One would expect cheers from banks and investors in response to such moves, but when it comes to the expansion of coal infrastructure, typically conservative banking institutions and credit rating agencies are siding with the so-called tree huggers. That’s because today, for the first time since the industrial revolution, coal is actually an increasingly risky investment.

Today, for the first time since the industrial revolution, coal is an increasingly risky investment.

This has a lot to do with China’s changing relationship with coal. At present, China accounts for almost half of the world’s total coal consumption, which won’t surprise anyone who has tried to breathe while walking Beijing’s streets. The Chinese government, recognizing the social and economic harms of air pollution, plans to cap its coal consumption in the next five years. This is great news for the urban Chinese but bad news for the Australian economy — which currently accounts for 32 percent of Chinese coal imports — and for anyone banking on China’s continued increasing demand for coal.

What happens when big players overestimate the long-term value of an investment? The speculative bubble inevitably bursts. Think of the consequences of misjudging the real value of sub-prime mortgages in the late 2000s, dot-com companies in the early 2000s and Asian currencies in the late 1990s. According to leading economists, the next big risk may be coal.

China is the largest producer and consumer of coal in the world.

Those making the case for the “carbon bubble” — including HSBC, Citigroup, Standard & Poor’s, Nicholas Stern and Al Gore — argue that in today’s market, fossil-fuel reserves are dramatically overvalued. The world’s governments have pledged to limit global temperature rise to two degrees Celsius, and if we even want to come close to this goal, 60 to 80 percent of global fossil-fuel reserves will have to stay in the ground. But mining companies, coal exporters and institutional investors aren’t taking this slowdown into account when they make their investments.

Essentially, the markets are betting against governments actually implementing carbon-reduction policies in the coming years, forgetting that when China makes a decision it almost always follows through. China has already demonstrated its commitment to carbon reduction by launching the world’s second-largest carbon trading exchange in Guangdong and four other city-based exchanges, in advance of a national rollout in 2015.

So, what will happen when the world’s biggest coal importer caps its coal consumption? First, large investments like the Australian port expansion won’t pay off and will have to be subsidized by the taxpayer. Coal-producing U.S. states like Wyoming, West Virginia